Investigation: Can China clean up after the aluminium king?

When Zhang Shiping died at the age of 72 in 2019, he was one of the wealthiest people in China. Bloomberg listed the entrepreneur as China's 36th-richest person, with a net wealth of $4.7bn. When Pi Taitian, Secretary of the Zouping Municipal Party committee, helped to unveil a huge memorial to him last May, he said he hoped his legacy, to “start business for the country and bring benefits to the people”, would continue.

But Zhang’s legacy is mixed. It’s true that his empire created thousands of jobs, but they came with financial sleight of hand, scandals and pollution. He built a business giant, the China Hongqiao Group and its subsidiary Weiqiao Pioneering Group. Part of it is listed on the Hong Kong stock exchange as China Hongqiao Group Ltd. Since the start of the pandemic, it nearly tripled its valuation.

The private business rose to become one of the biggest aluminium producers in the world after its subsidiary, The Shandong Weiqiao Pioneering Group, started ramping up production in the early 2000s. The secret to its success was its energy supply. Hongqiao’s factories were powered by one of the dirtiest and most inefficient energy models the 21st century had to offer.

Zhang was the founding father of the captive coal plant model or ‘Weiqiao model’ in which the company powers its own production plants with its own coal plants. Before transforming the aluminium industry, Zhang became known as the ‘textile king’ when he plugged a coal plant into one of his textile plants in 1999.

It’s now widely used across Chinese industry but it’s concentrated in the highly energy-intensive primary aluminium production, where owning a coal plant is a competitive advantage because it avoids costly electricity bills. With cheaper energy, his textile company grew into one of the largest denim and cotton-yarn businesses, and the company’s aluminium segment competed against Chinese state-owned enterprises (SOEs) and other international giants.

Mr Zhang became the ‘aluminium king’. Other Chinese aluminium firms copied his model, especially in Shandong province, and also thrived. But Zhang built his own electricity grid. Hongqiao always seemed to be a step ahead.

For years, the Chinese government struggled to properly regulate this kind of set-up. Then things started to change, but slowly.

In 2014, his company’s relationship with the regulator became a game of cat-and-mouse. Environmental scandals revealed how parts of Hongqiao dodged environmental controls. The ministry of environmental protection found Shandong Weiqiao Pioneering Group to have illegally built 45 generating units since 2013. In 2016, it had to close down some capacity.

In 2014, it paid a fine of Rmb150,000 (£176,000) for environmental violations, together with eleven other firms. In 2016, in Xinjiang province, Hongqiao was charged with operating unlicensed mills with a capacity of 2,000kt, as well as ignoring Chinese emissions standards. In 2017, it was ordered to pay Rmb200,000 (£23,000) for falsifying legal documents to obtain electrolytic aluminium production capacity. A year later it paid another Rmb400,000 (£45,000). All this is small change compared to the £4.5bn in revenue the company group made in the first six months of 2020. “Compared to the business, the fines were a drop in a bucket,” said Aiqun Yu, China coal power analyst at Global Energy Monitor (GEM).

Slowly but surely, government and public began to worry about the contribution this form of aluminium production makes to both local pollution and global climate change. Pushback became strong in Shandong province, where coal plants were built from 2013 to 2017. One reason was coal fume clouds blown by the wind towards Beijing, where they added to choking levels of pollution and angered party members.

In 2013, the State Council launched its four-year clean-up operation of seven provinces and major cities in its Air Pollution Prevention and Control Action Plan, but progress in Shandong was slow. ‘The war on pollution’, as Beijing called it, broadened measures to curb on-site coal-fired electricity plants. In 2018, China announced operators must pay fees to help fund $12bn in cuts to commercial and industrial electricity prices.

There was international pressure too. The International Energy Agency (IEA) reminded China that the Sustainable Development Goals demand aluminium production’s emissions fall by 1.5 per cent each year up to 2030. The violations declined under all this pressure but the pollution continued.

Captive coal power: the success story that turned into a nightmare

Mr Zhang started a trend and made captive coal a predominantly Chinese phenomenon. Today, China’s captive coal power capacity towers far above any other country in the world (see chart). Private companies embrace captive coal power because they save on having to pay for their social responsibility that is included in the public utility pricing, Aiqun Yu says.

The aluminium sector accounts for the world’s largest share of captive coal with an estimated operational capacity of 84GW. And most of that, 78GW, is on China’s mainland. It’s about 1.6 times the entire coal fleet of neighbouring Japan or 1.7 times the size of Germany’s entire coal power industry. China’s captive aluminium capacity is concentrated in a handful of locations. Shandong and Xinjing account for 56GW - or nearly half - of operational capacity of captive coal in January 2021.  

The carbon footprint of captive coal for aluminium is huge. These plants account for 7.7 per cent of overall Chinese coal power capacity. Ted Nace, GEM’s executive director, says that if this also represents 7.7 per cent of China's 124 billion tonnes of remaining lifetime CO2 for coal plants, it would amount to about 9.5 billion tonnes of CO2, assuming a 40-year lifespan for a coal plant. “That's a significant chunk of the world's carbon budget,” he said.

A mountain of coal power to cut

Deep cuts are required to meet the international 1.5 degree warming goal. China needs to shrink its 1,022GW coal power capacity stack of today to below 680GW in 2030. The government may want to start with aluminium captive coal because these plants are the smallest and most inefficient type of plants, consultant and research fellow at Wuhan University, Huw Slater, tells E&T. Also, for years, these private companies enjoyed benefits over much more tightly ruled state-owned enterprises and enjoyed leniency when it came to pollution and misconduct.

The government did make changes but did they work? Last March, the China Hongqiao Group announced it would dispose of large amounts of captive coal capacity. Some 3bn yuan ($422m) worth of coal-fired power generation assets were to be sold off. In its interim report, it spoke of an impairment loss of around RMB1,174,743,000 (£133m) with respect to the group’s property, plant and equipment.

China Hongqiao Group may have sold on-site plant capacity but it did so to a company linked with Hongqiao. (see illustration for how the buyer and seller were linked). GEM analyst Jianqiang (Leo) Lui thinks the apparent sell-off may have just been for PR.

Hongqiao would find it difficult to let go of its power supply so fast, he said. Weiqiao pulled out of the public grid in the late 1990s to run its own power plants in its own isolated, independent grid. Competitors in the aluminium industry tried to follow Weiqiao's captive model but few were able to replicate its success.

Are renewables the alternative for aluminium? Many started talking about ‘green aluminium’ when Weiqiao moved to Yunnan’s hydropower capacity as the replacement source in its ‘sell-off’. But Aiqun Yu says it’s just one bad source to another: “It’s not a sustainable way forward”. A 2020 study by researchers from the Institute of Hydropower and Hydroinformatics, at Dalian University of Technology, identified vulnerabilities in Yunnan's hydropower landscape from looming climate change.

Another problem with renewables by themselves is consistency of supply - unless batteries are involved, which then drives up the costs for the power-intensive aluminium production.

Some green-tech innovators think renewables can be an electricity source for aluminium plants if some issues are resolved. Geoff Matthews at Energia Potior, a firm that commercialises a new generation of mechanical technology called EnPot, developing a new way for aluminium smelters to consume energy, said that for large-scale renewable energy grids newly built today, flexible aluminium smelting as a cornerstone off-taker is beneficial. This means, the grid can cope more easily with imbalances from energy production by renewables.

Energy prices for renewables such as PV have dropped compared to prices of energy from coal. Comparing solar and coal power side by side, an assessment in 2019 for 2021 by financial think tank Carbon Tracker of over 2,000GW of global coal-fired capacity found that for short-run marginal costs around 1,200GW of it may have operating costs higher than the average price of electricity from auctions for solar PV.

Hongqiao: some more subtle trickery remains

Hongqiao’s increasingly complex structure makes life difficult for the Chinese regulator. It cuts entities into many smaller elements, seemingly independent in nature. Some of these small subsidiaries start with ‘Hong’ (宏) like the group’s name, China coal power. “But many don’t,” Yu says. China Hongqiao Group Limited is not even officially based in China but, like many shell companies and other Chinese private conglomerates, has an official address in the Cayman Islands.

Complexity continues with Weiqiao. The Shandong Weiqiao Group owns a complex network of small and larger captive coal plants (see map), all under the Hongqiao umbrella. Just like Hongqiao, Weiqiao is hard to pin down. Its financial structure seems intentionally complicated. Yu followed the development of Hongqiao and Weiqiao for years and says “they are trying to hide really well”.

Progress with limits

Weiqiao has retired some of its captive coal plants: 6,560MW which is nearly a third of them (1,980MW just last year). Many of the 2020 retirements were built only a few years ago, between 2010 and 2013. Yet, as of January 2021, it still operates 50 captive coal power units with a total capacity of 22.7GW, all dedicated to aluminium smelters. That’s nearly the size of Australia’s entire coal fleet.

E&T’s satellite analysis shows the pattern of closures. Plants are only partly retired, with large pieces left and only smaller parts shut down. The captive coal plant of Shandong Weiqiao Group’s Binzhou Heating Supply Units is one example (see below). Four of its 12 units, or a total of 1.3GW, remains in use. The smaller part, some 780MW, was shut for good in 2020 (see demolished sites in the south of the plant).

Private coal power plants are named as though they are public utilities too, with phrases like ‘public utility centre’ or ‘public heating supply centre’ featuring in their titles. This gives the impression that plants belong to the state-owned grid, while in reality, they belong to the less regulated private club.

(See the comparison here, if the graphic isn't viewable)

There is some good news. The government is now putting obstacles in the way of plans for captive coal power construction projects in the aluminium sector. 9GW of China’s captive coal fleet is still under construction, but the majority isn’t in aluminium. Of the 13.6GW of shelved plants – where plans are frozen with a chance to shelve them for ever – a whopping 10.4GW is in aluminium. How strict the government can be to keep them shelved is another question.

Coming to an arrangement

Weiqiao violated state laws in the past but since 2018, when China's central government Environmental Protection Inspection Group 3 inspected the company, it has behaved better, said Yu. So can Weiqiao be trusted now? It appears the government and Weqiao came to some ‘arrangement’. Yu’s theory is that the shut-down of Weqiao’s smaller units was a trade-off, perhaps a deal with the government to keep the much larger eight-times-660MW units alive. Those were only built as recently as 2016 and 2017 and the government might find it easier to monitor them. In exchange it committed to shut down the smaller ones. Instead of provincial regulators, these plants were officially shelved by the Central Government's Inspection group.

How does this all square with China’s carbon emission commitments?

Last December, China started to be more specific about how quickly it wants to cut carbon dioxide emissions per unit of gross domestic product. Under the new 2030 timeline carbon intensity will be slashed by more than 65 per cent from its 2005 levels.

The big question is how the country will get there. If China decides it wants to make progress fast, these private captive coal companies are the way, says Nace at GEM, and easier than enforcing rules on larger SME companies.

The future also depends on the 14th Five Year Plan, due to be approved in March. Analysts say the government wants to increase the share of non-fossil fuels in the primary energy mix and cut coal power capacity. It’s both mentioned in the outline of the general 14th FYP and the more specific plans, analysts say. New targets will also affect low-carbon and emissions-reduction efforts in the aluminium industry over the coming five years. Captive coal clearly stands in the way of the state’s campaign to green-up its power system.

Putting a carbon price on captive coal power may also help. Such pricing makes it more expensive for private companies with on-site captive plants and may drive Hongqiao towards the state-owned grid. Captive coal power was added to the national carbon trading scheme, and analysts E&T talked to think it’s a step in the right direction.

Could China dispose of all of its private captive coal power plants if it wanted to? Maybe. It depends how strict it can be with private companies like Hongqiao. So far, the track record is weak. It proved harder than anticipated to pull the plug cord of a company that, apart from supplying electricity and heat to its aluminium smelters and textile facilities, also supplies it to some of its employees. Electricity and heat are cheaper than from public utilities, and extremely popular", analyst Yu says. But this energy comes with less stringent environmental checks and balances than the government applies to state-owned companies.

Ted Nace thinks that renewables must play a role. Aluminium smelting requires really stable energy supply, at least 60 per cent of constant power supply, according to a report by Aluminiumtoday from last year. Maintaining a mix of sources helps, such as a combination of solar, wind, battery, but also demand management, accounting for different and cheaper prices during the daytime.  

Trimet, Germany’s largest aluminium producer, has piloted a new process that turns smelters into ‘virtual batteries’ capable of compensating for fluctuations in the power grid, complementing variable renewables. Also, there is demand-side response technology introduced in Australia. It positions aluminium smelters as providers of grid levelling services.

Meanwhile, aluminium prices skyrocketed last year. That’s good for companies like Hongqiao and the country. Last year, China cashed in, giving it a welcome buffer against the economic effects of the pandemic. The country produced a record output of 37.08-million tonnes in 2020, growing 4.9 per cent from 2019. Capacity spiralled in the emerging smelting hub of Yunnan where Hongqiao sees hydropower capacity opportunities.

Green aluminium is in sight. If solar power can be distributed well, some of the power imbalances will be levelled out, Nace thinks. Also, by distributing solar and wind you naturally don't get as much variability when you're dealing with the entire system, he says.

Aiqun Yu, more sceptical about a rapid change towards renewable captive aluminium smelters in China, still sees a bright future ahead. Now it’s up to the government to enforce it. The only one this won’t bother any longer, is Zhang. The aluminium king is off the hook, again.